Groupon IPO Big Test for Banks

In some respects, the highly anticipated initial public offering of Groupon is just as much a test of the investment banks that are trying to take it public as the startup itself.

Bloomberg News

That test began late Friday as a gaggle of banks revved up their effort to sell shares in a company that has faced tough questions, growing skepticism and a plummeting valuation over the last six months.

The Groupon road show begins on Monday and will focus on the Eastern seaboard the first week, with stops in New York on Monday, the Mid-Atlantic region on Tuesday, and Boston on Wednesday, while circling back to New York on Thursday and Friday, according to an email reviewed by The Wall Street Journal that was sent by an executive director of institutional equity sales of J.P. Morgan late Friday afternoon to potential buyers of the shares.

The initial reactions to the deal will come from big institutional investors on Monday, who will be invited to private sessions with Groupon executives, said one investor who has received an invitation to the road show.

Smaller investors will be invited to the group sessions being held later in the week. On Wednesday, Groupon is hosting a group lunch at the Intercontinental Hotel in Boston, according to the email. On Friday, Groupon is hosting another group lunch in New York at the St. Regis Hotel, according to the email. “There is a lot of hierarchy in banking,” said the investor.

The second week will take the Groupon show West with stops in San Francisco on Monday the 31st, Denver and Los Angeles and Tuesday, and the Midwest on Wednesday, before the company hopes to price the offering on Thursday November 3.

The active bookrunners of the offering are Morgan Stanley, Goldman Sachs and Credit Suisse, while the passive bookrunners include a host of other banks such as J.P. Morgan, Allen & Company, Bank of America Merrill Lynch, Barclays Capital, Citigroup, Deutsche Bank Securities, Wells Fargo Securities, and William Blair & Co., according to the email.

One top venture capitalist whose firm did not invest in Groupon said he has been getting calls over the last few weeks from investment bankers about the deal. “They are very nervous,” he said.

Participating bankers are calling venture investors to get a read on the situation and sound them out on valuation. They thought the deal was going to be an easy money bonanza but in their rush to jump on the Groupon bandwagon they may have missed or overlooked serious red flags, such as slowing growth, accounting and disclosure gaffes and massive insider selling, said the venture investor.

Banks will have a lot of egg on their face if they don’t get this deal done at a valuation high enough to make money for its late stage investors who valued the company at more than $5 billion less than a year ago when Groupon raised around $950 million, said the venture investor.

Earlier this year when banks were jostling to get in on the Groupon deal, they believed Groupon could sell more than a $1 billion of stock, giving the three-year-old company a valuation of $20 billion or more.

Now, the banks are hoping to selling as much as $621 million in stock for a valuation north of $10 billion, according to the company’s prospectus. The JP Morgan email said the approximate sale of stock would be worth $510 million.

In another sign of growing tension, Groupon and its banks have drastically cut the amount of stock they are trying to sell to just 5.4% of available shares, which in theory could help prop up the price of the company. The risk of keeping a very small float is that it could increase volatility in trading and turn off big investors who seek highly liquid stocks to trade.

Only three of the 1,213 U.S. IPOs since 1998 that raised over $100 million offered 5.4% or less of their shares when going public, according to Dealogic. Nine of 10 U.S. IPOs over $100 million are done with sales of more than 15% of a company’s stock, said Dealogic, with most done at between 15% to 35%.

Representing Groupon will be CEO Andrew Mason, chief financial officer Jason Child, senior vice president Jeff Holden and vice president Kartik Ramachandran, according to the email.

Comments (4 of 4)

For me, this company and the entire concept behind it does not pass the Common-Sense Test. I've read repeatedly that most small business owners interviewed about their experience hate it. Most users hate it too after the first encounter. To avail of the service, the customers must endure a series of irritations, culminating with that sheepish feeling of getting a big discount from a small business who hopes to bring them back in again, knowing they'll never be back. Unless you're a day trader, I'd avoid it.

4:12 am October 24, 2011

Mark wrote :

Invest or don't invest that is your choice. What I still fail to understand is how the pin stripe boys justify their valuations. No wonder Wall Street crashes when the truth is revealed.
Please explain:

- Groupon forecast turnover based on correct accounting standard for 2011- $1.5 Billion
- This means the $12 billion valuation equates to 8 x PE valuation on turnover
- Assuming they aim to make a 25% profit margin. We all know about the losses they currently are making with adv. expenditure but lets assume that this as there end game profit margin.

This would mean that if Groupon continues to grow turnover at 33.3%pa from today and make 25% profit margin from today then they would pay back this $12 billion investment in +-15 years!

What am I missing do they exepct to grow by doubling their turnover each year and pay this back in 6-7 years?
Finacial gurus help please...

6:32 pm October 22, 2011

This is another test of banksters' ethics (or lack thereof) wrote :

This will only reveal once again that banksters are all too willing to pawn off crap on the public (including their own clients - Abacus, anyone?) in an effort to pad their undeserved salaries and bonuses. They are always, in their own minds, worth every penny (or billions of dollars), the "best and brightest," most essential "job creators," etc., according to the press, their lobbyists, and their paid-for politicians until they are shown once-again to be complete unethical failures who cannot even perform their jobs (unless that job is essentially making their clients poorer and themselves richer, which they say is more important than coal mining, teaching, building roads, enforcing the law, saving lives, working in hospitals and schools and flying planes, steering ships and barges, etc.,). So the taxpayers are left on the hook for more bailouts, more nonsense, and more games that threaten entire economies. Awesome! Groupon IPO - symptom #50503 of how completely warped the whole system is and rigged against the Average Joe.

1:26 pm October 22, 2011

Overall Decline, No Q3 Auditing wrote :

Groupon should be nervous. Its growth decelerated in Q3 once the marketing spigot was turned off, even using the unaudited financials it provided in the newest S-1. Despite shifting marketing around to limit Q3 expenses, its shareholder equity actually went negative in Q3, meaning that it's technically insolvent (link: http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/362). Groupon needs this IPO to survive as a going concern, yet it couldn't even show growth during its last quarter as a private company. Why should investors board Groupon's sinking ship?

Thanks for reading Deal Journal. We would like to direct you to MoneyBeat, the Wall Street Journal’s brand new global blog. MoneyBeat unites MarketBeat, The Source, Overheard and all the Deal Journal blogs, bringing together all the market, M&A, IPO and hedge-fund news from those blogs into a 24-hour hub for finance news. Check it out and let us know what you think at moneyblog@wsj.com.

About Deal Journal

Deal Journal is an up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street, including mergers and acquisitions, capital-raising, private equity and bankruptcy. In short, wherever money changes hands. Deal Journal is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s David Benoit is the lead writer, with contributions from other Journal reporters and editors. Send news items, comments and questions to deals@wsj.com.